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The global triple crises - finance, environment and food

UNU-WIDER / Aug 2012

Three global crises -finance, environment and food

The global economy is currently facing three crises which threaten to undermine the welfare and prosperity of present and future generations. The first is the financial crisis which originated in the north but which has also effected the South through reduced demand and lower prices for their exports. The second crisis is climate change, the growth in carbon emissions continues unchecked and rises in temperature and sea level are exceeding previous estimates. The third crisis concerns the rise of malnutrition and hunger caused by the recent price hikes in global food prices.

In the WIDER Working Paper 'The Triple Crisis and the Global Aid Architecture' Tony Addison, Channing Arndt and Finn Tarp (AAT) focus on the financial dimension of the huge challenges facing the global economy and how it interacts with the increasing challenges of climate change and food security.

The financial crisis and development aid

The budgets of bilateral aid donors are ultimately linked to their countries economic size, the current target is for each DAC country to devote at least 0.7 per cent of their gross national income (GNI) to development. The IMF estimates that across the 88 advanced, emerging and developing countries in which there has been banking crisis output per capita has fallen by, on average, 10 per cent relative to the pre-crisis trend. Consequently even if all DAC countries do meet the 0.7 per cent target by 2015 (the target date for the Millennium Development Goals) Overseas Development Aid (ODA) will be lower in terms of absolute volume than we would have predicted prior to the current ongoing economic crisis.

AAT believe there are two reasons to be pessimistic about donors increasing the proportion of GNI they devote to aid to offset the economic crisis. First, the ratio of ODA to GNI was falling in 12 out of the 22 DAC countries, including the USA and Japan, even before the financial crisis struck. If countries were reducing the proportion of GNI they committed to aid when they were growing at, on average, 3 per cent annually then we may be naïve to expect them to increase that proportion at a time when growth rates, even if they are positive, are very low. Second the financial crisis will, in many cases, lead to fiscal crisis as governments commit vast sums of money to recapitalize banks at the same time as their tax base is falling.

The example of the UK is illustrative as it has expressed a strong commitment to raising aid but is also one of the countries whose economy has been most affected by the financial crisis. Public debt in the UK rose from 48 to 58 per cent of GDP within a year and the country is likely to experience an especially severe loss in output due to the size of its financial sector (which accounts for 10% of GDP). The fact that the aid budget has survived is due to a cross party commitment to achieving the goal of aid accounting for 0.7% of GDP by 2013. However the effect of the financial crisis is that even if this goal is reached the actual size of the UK's aid budget will be lower due to the output losses created by the financial crisis.

Implications for Africa and aid architecture

If aid does stall then it will do so at a time when the current crisis is hitting the finances of poor countries hard. Tax revenues are down and debt service is up. These problems are particularly severe in Africa. Further, public finances in Sub-Saharan Africa are heavily dependent on trade taxes thus making it particularly vulnerable to any external shocks that reduce the value and volume of exports and imports.

Critics of aid will not see a downturn in aid volume due to the financial crisis as a bad thing. If aid is ineffective, then a downturn will have little impact. If it is pernicious, then the downturn may actively encourage growth in poorer countries. However recent studies of Aid have demonstrated that both such views are implausible, there are undoubtedly certain instances in which aid has failed to work however the weight of empirical evidence shows that overall aid has a positive effect on economic growth. Further even if we were to think that it might be worth testing the impact of withdrawing aid, now would not be a good time to do so as it is unlikely that private capital flows will step in to fill the gap in the current economic climate.

The financial crisis places aid at a critical juncture, and Africa, the most aid dependent region, will find it difficult to build on its progress in attracting private capital flows. Aid will also be stretched by the challenges of climate change and food security and it is these dimensions of the triple-crises we must now address.

Restoring global growth: to what end?

The global recession may reduce global carbon emissions by up to 3 per cent, the steepest fall in 40 years. However if recovery is achieved, and policy steps are not taken, then greenhouse gas emissions will simply resume their upward march. It is then important that when thinking about how growth can be achieved we also think about how that growth can be sustainable. This is not an easy task as a failure to invest in sustainable energy research over three decades has reduced the available policy options. Of the few non fossil fuel energy options that are available two are nuclear power and biofuels, both of which are controversial.

One of the potential ways in which growth could be made more sustainable is through the increased use of biofuels. This however creates a potentially tight link between food and fuel prices. As more agricultural land is given over to biofuel production at the same time as global demand food prices have pushed higher, spiking between the years 2007-2008. Climate change also has the potential to deepen the food crisis through extreme weather events as well as through declining rural livelihoods forcing people into cities and thus increasing urban food demand.

The fiscal effect of climate change is also substantial; the World Bank estimates the annual costs of adaption to climate change to be between US$75-90 billion. This will make poorer states more aid dependent and the number of fragile states will rise as flood and drought undermine societies. Fragility can lead to conflict, and states in conflict are the most aid-dependent of all. The World Banks estimate that the costs of mitigation of climate change in developing countries at between US$140-175 by 2030, this figure far exceeds the rough US$100 billion currently given in ODA. Illustrative of the current skewed global priorities is the fact that the annual global subsidy to the use of fossil fuels stands at US$150-250 billion.

How then can these problems be overcome? AAT argue that the core of any serious attempt to come to grips with climate change must be a carbon tax, or carbon license system. Further this increased aid flows targeted at mitigating climate changes mean that institutional mechanisms for allocating, disbursing and monitoring funds will have to be created. Current aid aimed at climate change mitigation is fragmented and this is unlikely to be the best approach.

To deal with the rise in food and energy prices likely to occur due to a return to growth,a new global food architecture needs to be developed and social protection, which is still largely dependent on aid, needs to be enhanced. The amount of aid needed to achieve these goals remains significant, and prospects for aid increases, at least in the short term, are dim.

The path to a sustainable recovery is not straightforward; the extraordinary nature of the triple crisis needs to be taken account of in global-policy making and analysis.